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When we are not thinking objectively, we risk making poor or impulsive decisions. In the property game, this can mean purchasing an underperforming asset, losing money, having to start all over again and even regretting the home you have chosen for yourself.
Why does property provoke our emotions?
– It is the only asset or investment that we live in.
– It is the most expensive asset class
– It is closely linked with our financial goals and aspirations (eg: making sure that you have invested wisely for a comfortable retirement)
What does this mean for us?
Buying a home is an inherently emotional decision, it is undeniably connected with your dream lifestyle, your family and your vision of the future. Home-buying carries with it a great deal of emotional baggage, whether it is about finding the perfect home to raise the kids or live in a location that you love. Then comes the emotion of the auction day – the home is ideal, it’s exactly the location you want, there are 5 other parties keen on it… you need to be the purchaser!
Whilst home-buying is obviously emotional, it is often over-looked that purchasing an investment property can also be an emotional experience. The trap here is that you pass over great investment opportunities because the property does not fit your ideal description of a dream home. For your family, you envision a big backyard – your kids will always remember the days where they kicked around the ball, had barbeques in summer and helped you with the gardening. Tenants on the other hand will find your perfect garden a hassle to maintain. The attributes of the property you purchased, which are attractive to you, might send prospective tenants running for the hills.
Letting your emotions overly influence your decision when purchasing a home or investment increases the risk of over-committing financially or buying an underperforming asset. When emotions are misdirected they can lead to poor decisions which adversely impact your lifestyle by not purchasing a home that’s right for you. From an investment perspective, it can mean receiving poor rental returns, reduced capital growth, or even having huge headaches from problem tenants.
It is imperative to go into the market with a clear head.
Rushing into decisions carries the risk that you buy on a whim and purchase quickly, because you do not want to commit the required time and effort to the process, or you are simply tired of the prolonged drudgery of searching for property and would like it ‘over and done with’.
Conversely, delays associated with the fear of taking on debt, purchasing the wrong property, paying too much or second guessing the timing of the market can be very costly and cause ‘paralysis by analysis’.
So, how can we emotionally detach ourselves?
Planning and preparation! If we have a clear strategy and set of steps to undertake towards purchasing as part of an overall plan, we will gift ourselves the advantage of more objective and logical decision making.
Before we start looking for property, we must first understand:
• how our next property fits into our short-term and long-term plans.
• where we need to compromise.
• determine the appropriate price relative to our affordability,
• the appropriate location based on our budget
We can then begin the search and ultimately negotiate the successful purchase of the right home or investment.
When purchasing a home or investment, it is important to keep your emotions in check. If you find that you cannot remove the emotion in purchasing, you may want to enlist the help of someone who is objective (by this, we do not mean a family member) and independent from selling or buying property. You want to be careful to steer clear of property spruikers or anyone who makes money from your purchase in particular. People who have a stake in property sales can hardly be called unbiased.
Ultimately, the key to making great property decisions and minimising unhelpful emotions is a mixture of getting many things right in combination. It involves knowing yourself, your goals, having a plan, and successfully managing risk, money and your mortgage strategy before even stepping into the cauldron of the property selection and buying process. This will enable you to have the ability to take a step back and consider your options calmly and rationally. Do you have a Property Plan to help remove the emotions from your property buying?
David Johnston is the founder of Property Planning Australia and the author of ‘How to succeed with property to create your ideal lifestyle’ and ‘Property for life – using property to plan your financial future’.